Dell's largest investor opposes buyout as too low

Dell Inc's largest independent shareholder, Southeastern Asset Management, on Friday vowed to fight a $24.4 billion buyout of the No. 3 PC maker led by CEO Michael Dell, cementing opposition to what would be the largest buyout since the start of the financial crisis.

Southeastern's opposition to the deal, which Reuters first reported late on Thursday, sets up a potential battle with billionaire founder Dell and private equity firm Silver Lake, who are pushing a deal to take the company private at $13.65 a share.

Southeastern, run by activist investor Mason Hawkins and owner of 8.5 percent of Dell, including options, argues that the company is worth $24 a share if its financial services division, recent acquisitions and other assets were factored in.

With Southeastern's objection, shareholders representing 11 percent of the Dell shares not held by Michael Dell have now said they will vote against the deal, according to news reports. Billionaire Dell, who created the computer maker out of his college dorm room in 1984, holds a roughly 16 percent stake.

Dell shares reversed course and climbed into positive territory on Friday after the announcement, and closed up 0.74 percent at $13.63.

"We are writing to express our extreme disappointment regarding the proposed go-private transaction, which we believe grossly undervalues the Company," Hawkins and Chief Investment Officer Staley Cates wrote in a letter.

"We retain and intend to avail ourselves of all options at our disposal to oppose the proposed transaction, including but not limited to a proxy fight, litigation claims and any available Delaware statutory appraisal rights."

Representatives of Dell and Silver Lake declined to comment on Southeastern's statement.

Sanford Bernstein analyst Toni Sacconaghi estimates Hawkins' asset management house paid an average of more $20 a share for its stake, meaning a loss of at least $825 million at the current $13.65 offer price.

A LOOMING BATTLE

Under the buyout's terms, a majority of shares not held by Michael Dell must be voted in favor of the deal for it to proceed.

Memphis, Tennessee-based Southeastern believes the Dell board had several alternatives that would have produced a far better outcome for public shareholders, including breaking up the company and selling the units separately.

"Selling multiple business units to strategic buyers could easily exceed $13.65 per share," the letter read.

Dell was regarded as a model of innovation as recently as the early 2000s, pioneering online ordering of custom PCs and working closely with Asian suppliers and manufacturers to assure rock-bottom production costs. But it missed the big industry shift to tablet computers, smartphones and high-powered consumer electronics such as music players and gaming consoles.

Michael Dell struck a deal early this week to take Dell private for $24.4 billion in the biggest leveraged buyout since the financial crisis, partnering with Silver Lake and Microsoft Corp. The aim is to facilitate Dell's difficult transition from a commodity maker of computers into a provider of services to enterprises as a private company, away from Wall Street's scrutiny.

But Southeastern, the most prominent of a clutch of investors, including the Alpine Capital Research and Schneider Capital funds, which have voiced opposition to the buyout, on Friday argued that the company had the capability to pay a $12 special dividend to shareholders, realizing much more value while still retaining significant cash-flow.

It also suggested a Dutch auction or some other structure that would involve a public tender of shares.

Dell has now gone into a go-shop process, during which it can solicit better offers. But Hawkins and Cates argue that Michael Dell's involvement may affect that procedure.

"We are concerned that given the participation of Michael Dell in this transaction, that a traditional go shop process is not sufficient to ensure that the Company receives superior offers," they wrote.

Morningstar analyst Carr Lanphie said it is not a surprise that some investors do not like the offer price, but said the stock would fall sharply if the deal does not go through.

"The point being that if this doesn't go through, you are going to swallow a 35-40 percent decline in share price," Lanphie said. "Then, your chairman just had his attempted buyout rejected.

"Given the management they have lost in the last couple of months, will they be able to continue to grow the company? That is something the investors will need to consider," he added.